As a result, there is far greater choice and application to private mortgage loans than there was in the past.
Previously, private lenders were viewed as lenders of last resort with the term hard money attached to private lending relating to the potential hard line approach to defaults taken by lenders and the sky high interest rates you were charged.
While the majority of private money is still placed by private individuals, there are more individual lenders working together in small groups, putting their funds into mortgage investment corporations (MIC’s), or syndicating deals with other lenders.
This expansion of the private lending market space has also seen lender become more specialized in terms of the deals they are prepared to look at and the rates and terms they are prepared to give out.
For very well secured deals with strong exit strategies its not uncommon for private lending rates to even rival what can be obtained through a bank in many situations although rates on average are still going to be higher for private lending versus bank or institutional residential mortgage lending.
On average, private mortgages are for an interest term of one year. That being said, there are private lenders that will consider a longer interest term and still others that will look at a long term lending scenario with an amortized repayment schedule.
At the end of the interest term, the mortgage will either need to be renewed, if that is even an option, or paid out by another mortgage or some other source of capital.
We mentioned the main uses of private mortgage financing for residential property included debt consolidation, construction, bridge financing, and fast close or quick close mortgages. Lets look at each one individually.
Debt consolidation. For applicants looking to utilize the equity in their home to pay down higher priced short term debts, private mortgage financing may be the best fit, especially if the applicant’s personal credit is poor or fair at best. A debt consolidation loan via private mortgage usually comes in the form of a second mortgage due to the fact that the applicant does not want to refinance the first mortgage and lose the lower rate associated with it if the mortgage is with an institutional residential mortgage lender. Debt consolidation can also be done with a private mortgage in first position or third position, depending on the given scenario and the lender’s comfort with the amount of funding requested versus the expected risk of loss.
Construction Mortgage. The most common form of renovation and construction loans is via private mortgage due to the speed in which an approval can be put into place and the more straight forward the administration and draw management process tends to be. Typically, a construction loan is registered as a first or second mortgage against the property acquisition mortgage, although some construction mortgages will be in first mortgage position as well.
Bridge Financing. In many ways, most all private mortgages are bridge loans in that the interest term provided by the lender is for a very short period of time, predominantly one year in duration. In situations where capital is required right away for a short period of time, leveraging a real estate asset with equity is the easiest, simplest, fastest way to raise capital. There is certainly a cost for bridge financing that will exceed what you can expect to pay at a bank or primary mortgage lending institution that could give you the same financing, but the cost benefit relates to the speed of a private mortgage transaction where if you don’t have money by a certain time the end cost you could be faced with could be substantially higher or worse if you loose out on a good deal.
Quick Close Mortgage. There is a quick close or fast close element in all private residential home mortgage financing requests, but some times speed is truly at a premium with the ability to close a transaction or satisfy a debt hanging in the balance unless money can be located and secured quickly. So how quick is quick. If everything required by the lender is readily available and all sides go out of their way to be available and execute all documents as required, a mortgage can be put in place from two to five business days. The fast close process is not going to be possible with all private lenders with certain individuals or groups more focused in taking advantage of this particular need in the market.
There are other potential financing scenarios that could be satisfied with a private mortgage on a residential property. Once again, the four listed above are the most common reasons why a private mortgage is required and are shown here to help give you a better understanding of how private lending works and when it may be a good option to consider.
As with all mortgage financing, there can be a number of options to consider. Further, most private lenders will only work through mortgage brokers, so its likely going to be important to be working with an experienced mortgage broker with direct access to private lenders that will be interested in financing your request. Our mortgage company works with a large number of private lenders that collectively cover off most of the different types of private mortgage lending applications that occur every year. Our goal is to quickly assess your requirements and then provide private lending options for your immediate consideration.